Winding up Petition after decree from DRT and recovery certificate issued

Winding up Petition after secured creditor obtained decree from DRT and recovery certificate issued upheld by the Supreme Court

ABCAUS Case Law Citation:
ABCAUS 2758 (2019) (01) SC

Important Case Laws Cited/relied upon by the parties
Allahabad Bank v. Canara Bank, (2000) 4 SCC 406
Amalgamated Commercial Traders (P.) Ltd. v. A.C.K. Krishnaswami and Ors.
Rajasthan State Financial Corporation v. Official Liquidator, 2005 8 SCC 190
Official Liquidator v. Allahabad Bank, (2013) 4 SCC 381

The present case involved the right of a secured creditor to file a winding up petition after such secured creditor has obtained a decree from the Debts Recovery Tribunal (DRT) and a recovery certificate based thereon.

The respondent Bank had advanced various loans to the companies in question. On default, the bank approached the Debts Recovery Tribunal by filing applications to recover the debt owed to them.

The DRT by judgments allowed the applications filed by the bank. Apparently, the said orders are final as no appeals have been preferred to the Debts Recovery Appellate Tribunal (DRAT) and the Recovery certificates was issued by the Recovery Officer under Section 19(19) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (Recovery of Debts Act).

Various attempts were made to auction the properties that were security for the loans granted, but each of these attempts has yielded no results.

In the meanwhile, the bank issued statutory notices for winding up of the companies under Sections 433 and 434 of the Companies Act, 1956. As no payments were made, a company winding up petition was filed before the High Court.

The main point of argument before the Hon’ble High Court was that once a secured creditor has obtained an order from the DRT, and a recovery certificate has been issued thereupon, such secured creditor cannot file a winding up petition as the Recovery of Debts Act is a special Act which vests exclusive jurisdiction in the DRT.

Also, it was also contended that a secured creditor can file a winding up petition only on giving up its security, which has not been done in the case.

However, the Division Bench dismissed the appeals in question.

The Hon’ble Supreme Court stated that it is settled law that a winding up proceeding initiated under Section 433(e) and 434 of the Companies Act, 1956 is not a means of seeking to enforce payment of a debt.

It was clarified that though earlier it was held that a winding up petition is a form of equitable execution of a debt, but this was qualified by stating that a winding up order is not a normal alternative to the ordinary procedure for realization of debts due to a creditor.

The Hon’ble Supreme Court again stated that the Court has recognised that a winding up proceeding is not a proceeding that can be referred to as a proceeding for realization of debts and would, therefore, not be covered by the language of Section 17 read with Section 18 of the Recovery of Debts Act. When it comes to a winding up proceeding under the Companies Act, 1956, since such a proceeding is not “for recovery of debts” due to banks, the bar contained in Section 18 read with Section 34 of the Recovery of Debts Act would not apply to winding up proceedings under the Companies Act, 1956.

The second important point raised by the companies was that a conjoint reading of the Companies Act, 1956 and the Provincial Insolvency Act, 1920, would make it clear that the secured creditor must, at the time of filing the petition for winding up, state that it has given up his security, or else, such winding up petition would not be maintainable.

The appellant, referring to the Section 441 of the Companies Act, 1956, in particular, subsection (2) thereof, argued that the winding up of a company shall be deemed to commence at the time of presentation of the petition for winding up, and that, if this is so, the stage at which a secured creditor has to give up his security is at the stage of the filing of the winding up petition itself.

The Hon’ble Supreme Court clarified that under Section 439 of the Companies Act, 1956, a secured creditor’s petition for winding up is maintainable without any requirement of it having to give up or relinquish its security.

The Court clarified that Section 529(1)(c) of the Companies Act, 1956 specifically refers to the right of a secured creditor under the law of insolvency “with respect to the estates of persons adjudged insolvent”. The express language of Section 529(1)(c) of the Companies Act, 1956 makes it clear that it is Section 47 of the Provincial Insolvency Act, 1920 alone that is attracted, and not the Section 9(2).

The Court rejected the reliance placed on Section 441(2) of the Companies Act, 1956 as misplaced for section 441(2) has to be read with Section 441(1), and so read, makes it clear that it became necessary to enact sub-section (2), because a petition for voluntary winding up of a company presented before the Tribunal would be said to commence at an anterior point of time, namely, at the time of the passing of the resolution whereby the company resolves to voluntarily wind itself up. In contrast, therefore, Section 441(2) says “in any other case”, i.e., in cases other than those falling under sub-section (1) of Section 441 of the Companies Act, 1956, the winding up of a company by the Tribunal shall be deemed to commence at the time of presentation of the petition for winding up.

The Hon’ble Supreme Court also made it clear that Section 434(1)(b) is attracted only if execution or other process is issued in respect of an order of a Tribunal in favour of a creditor of the company is returned unsatisfied in whole or in part. This is only one of three instances in which a company shall be deemed to be unable to pay its debts.

The Hon’ble Supreme Court said that it is not open for persons like the appellant to resist a winding up petition which is otherwise maintainable without there being any bona fide defence to the same.

When secured creditors like the respondent are driven from pillar to post to recover what is legitimately due to them, in attempting to avail of more than one remedy at the same time, they do not “blow hot and cold”, but they blow hot and hotter, the Court added before dismissing the appeal.

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